Adani Ports and Special Economic Zone Ltd (APSEZ), India’s biggest port developer and operator, has won approval from the Tamil Nadu government to acquire Kattupalli port located at Ennore near Chennai from L&T Shipbuilding Ltd, crossing a hurdle in the plan that was announced in November, at least two people briefed on the development said.
“The state government issued an order in early March approving the deal before the model code of conduct for poll-bound Tamil Nadu came into effect,” a government spokesman said.
APSEZ has not announced the state government approval for the deal nor has it been communicated to the stock exchanges yet. Clearance from the state is critical because the port is part of a shipyard-cum-port complex that L&T Shipbuilding has constructed at Kattupalli with an investment of Rs.3,989 crore.
L&T Shipbuilding is 97% owned by Larsen and Toubro Ltd (L&T), with Tamil Nadu Industrial Development Corp. (TIDCO) holding the remaining stake.
The Kattupalli shipyard and port was awarded to L&T in 2008 for development and operations for 30 years by the Tamil Nadu government as a so-called captive port without any competitive bid. A captive port is a port developed by an entity for handling its own (captive) cargo.
To facilitate optimum utilization of port infrastructure, the state government later permitted L&T to handle other commercial cargo at the captive facility, in line with its port development policy. L&T handles containers and cars at Kattupalli.
The port policy of Tamil Nadu under which the original deal was awarded to L&T does not permit the sale of the port because it was structured as a captive facility under a single entity—L&T Shipbuilding.
Hence, the sale needed the clearance of the state government to hive off the port from the shipyard.
“Kattupalli port is a part of the shipyard complex. L&T cannot divest it as per the agreement it had signed with the Tamil Nadu government in 2008 because it is operating under a single entity. If L&T want to divest it, it will have to split the company and assets and then divest it,” a second person familiar with the plan said, asking not to be named because he is not authorized to speak on the subject.
This has now been approved by the state government without any changes to the original terms signed with L&T Shipbuilding. While approving the de-merger of the port from the shipyard to facilitate the deal between APSEZ and L&T Shipbuilding, the state government, however, kept the original terms of the agreement it had signed with L&T unchanged.
L&T is contractually mandated to pay the state either the revenue share or a royalty per standard container handled at the terminal, whichever was higher, agreed in the 30-year contract.
The annual share of revenue L&T has agreed to pay has been set at 3% during the first 15 years of the contract. The revenue share percentage will rise to 4.5% for the remaining 15-year tenure of the contract.
The revenue share will be based on rates approved by the state government—a concessional rate for the first 15 years and full rate for the balance period, according to the Tamil Nadu port policy. The rate will rise by 20% every three years.
APSEZ will follow the same terms for the 30-year contract.
The state government has maintained status quo on the commercial terms while agreeing to de-merge the port from the shipyard and sale of the port to APSEZ, a spokesman for the Tamil Nadu government said.
“The revenue share is not changed; nothing is changed. It is based on the government order of 2008. The revenue share is constant for anybody starting a port without a competitive bid. For the first 15 years, the revenue share is 3% and for the balance period, it is 4.5%. That remains the same,” he said.
“The government order says that for anybody developing a green-field port, that will be the revenue share. The port itself came in 2008 without a bid and is handling commercial cargo. As per the ports’ policy, captive ports are permitted to handle commercial cargo. So, it came up as a captive port and was permitted to handle commercial cargo. There is no change in the commercial terms. All the schedule of rates, whatever the government collects from the ports in Tamil Nadu, APSEZ will have to pay the same. The shipyard will be with L&T while the port will be run by APSEZ,” the spokesman said, adding that the concession period will be 30 years from 2008.
APSEZ and L&T Shipbuilding declined to comment.
Located 35km from Chennai, Kattupalli started commercial operations in January 2013 from two berths with a total length of about 710 metres. The berths are designed to handle container, dry bulk and break-bulk cargo. There is environmental approval for further expansion.
The port has facilities including a container terminal with a capacity to load 1.2 million twenty-foot equivalent units (TEUs)—the standard size of a container—a year.
The port also has permission from the environment ministry to handle other clean cargo such as automobiles (cars, earth movers, trucks and buses), liquid non-hazardous cargo (edible oil, lube oil, etc.) and break bulk cargo (granite, gypsum, barytes, lime stone, steel and timber logs).
APSEZ and L&T have not disclosed the financial details of the deal.
“It (the price) is more or less near the asset value; we are not paying any premium for acquiring Kattupalli Port from L&T,” Karan Adani, chief executive officer of APSEZ, told Mint in December.
While awaiting the necessary approvals from the Tamil Nadu government, APSEZ through its subsidiary, Adani Kattupalli Port Pvt. Ltd (AKPPL), entered into an arrangement with L&T to take over the operations of the port in November.
Kattupalli Port is located adjacent to and north of Kamarajar Port, where APSEZ is developing a container terminal which will start operations in September. “This move of APSEZ is yet another step towards building a network of ports across the Indian coastline and further expand its footprint across the south-east coast,” Gautam Adani, chairman of Adani Group, said in November.
Across Gujarat, Goa, Andhra Pradesh and Odisha, APSEZ currently runs eight ports or terminals located at Mundra, Dahej, Hazira, Kandla, Mormugao, Dhamra, Vizag and Kattupalli, with new facilities under construction at Kamarajar and Vizhinjam.
Mundra is India’s biggest commercial port by volumes.
APSEZ has set a target of handling 200 million tonnes (mt) of cargo by 2020. It handled 144.25 mt of cargo in the year ended March 2015.